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Subway, DOL Compliance Deal a New Template for Franchises?

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Aug. 1 — The Subway restaurant chain is partnering with the Labor Department to improve wage-and-hour
compliance at its 27,000 franchised stores, creating a potential industry template
but raising questions about joint employment.

Under a
voluntary agreement announced Aug. 1, the DOL’s Wage and Hour Division will meet regularly with Subway
to share enforcement data and explore how franchisees can use scheduling and payroll
technology to avoid overtime violations.

The agency has already attempted to reach similar terms with other franchisers and
hopes the Subway arrangement motivates more companies to step forward, Weil said.

But those other businesses have yet to agree to a deal because the DOL wouldn’t commit
to shielding the franchisers from liability under other statutes, such as the National
Labor Relations Act, according to Matthew Haller, senior vice president for communications
and public affairs at the International Franchise Association.

The IFA and other business groups have sharply criticized a 2015 National Labor Relations
Board ruling broadening the test for determining whether a business is liable as a
joint employer for another organization's workplace violations.

Businesses may be joint employers if they “share or codetermine those matters governing
the essential terms and conditions of employment,” the board held in
Browning-Ferris Industries of California, Inc., 362 N.L.R.B. No. 186, 204 LRRM 1154
(2015).

NLRB Concerns Stop Other Franchiser From Signing

Senior officials at one national retail food franchiser told Bloomberg BNA that their
negotiations with the WHD stalled after Weil declined to assure them that the NLRB
wouldn't use wage-and-hour compliance education “as evidence of us being a joint employer
with our franchisees.”

Weil “looked at us and in a very politically correct manner, he said, ‘I can't guarantee
you that,' ” one company executive said. The officials spoke on condition of anonymity.

“We said we want to go down this path, we would like to talk about encouraging franchisees
to be in compliance with wage-and-hour laws, but we won’t go down that path without
some sort of assurance, at least from the DOL’s perspective, that we won’t be held
liable as a joint employer,”
the franchiser's executive said.

Although Subway signed off after receiving DOL assurance that the deal wouldn't be
the cause of added joint employment risk, the language itself is silent on the joint
employer topic.

However, the department, in a statement provided to Bloomberg BNA, said “nothing in
this agreement increases or decreases the likelihood that Subway could be held as
a joint employer in an investigation into FLSA violations by a franchisee conducted
by the Wage and Hour Division.”

Subway Deal Meshes Overtime Rule,
Browning-Ferris

The Subway agreement touches on two of the administration’s most controversial interpretive
shifts in workplace enforcement: the DOL’s
regulation (RIN:1235-AA11)
to expand overtime eligibility and the NLRB’s
Browning-Ferrisruling.

Subway’s “opportunity to help their franchisees understand their obligations under
the new”
overtime “rule was something they were very interested in,”
Weil said. The company wanted to allow the WHD “to use the agreement as a way to get
our materials out to their franchisees so that they could come into greater compliance
with the new rule,” he said.

The regulation doubles the salary threshold below which workers are eligible for overtime
to $47,476 per year, effective Dec. 1.

The
Browning-Ferris case is causing a different type of headache for some employers. Franchisers may
want to assist franchisees, many of whom have employees who will be newly eligible
for time-and-a-half pay. But they’ve been reluctant to leverage the more sophisticated
wage-and-hour tools at company headquarters out of fear that the NLRB could use the
information sharing as evidence of a joint employer relationship under its more expansive
standard, the IFA's Haller said.

That's why one particular provision in the Subway agreement is raising red flags.
The pact states that the parties “agree to explore ways to use technology to support
franchisee compliance, such as building alerts into the payroll and scheduling platform
that SUBWAY offers as a service to its franchisees.”

Weil Explains Software Provision

Asked to elaborate how Subway and the division plan to explore ways to leverage technology,
Weil said those discussions pertain to franchisees using software to flag nonpayment
of overtime and other FLSA violations.

“This is where of course” Subway is “going to be careful. It's not that that information
in the payroll system would come back to Subway corporate,”
the administrator said. Instead, Subway could have its franchisees adopt payroll systems
that “flag the potential of the violations of the law that the franchisee would need
to know; not that that then becomes a conduit back to Subway as a corporate franchisor,
because then it's no secret to anyone that they would have concerns about things in
the agreement that would lead them towards becoming a joint employer.”

But to some franchisers and management attorneys, this is still unsafe territory regarding
the NLRA.

“Many franchisors do have software programs that they require their franchisees to
utilize, and certain aspects of those software programs have been looked at as evidence
of control, especially with related to wage-and-hour-
and employment-related aspects of the relationship,” John Skelton, who represents
franchisers as a partner at Seyfarth Shaw LLP in Boston, told Bloomberg BNA.

“If their platforms and software that they require includes aspects that do control
wage-and-hour-related stuff on the franchisee level, that could be dangerous, because
that could from the NLRB perspective say, ‘aha that’s the kind of either exercise
control or reserved right to control that is evidence of a joint employer relationship,' ”
he said.

That's why it would behoove the DOL and NLRB to provide greater clarity on how such
compliance agreements for one law might affect a company's level of control under
another statute, the IFA and its members say.

To Weil, such collaboration with other agencies isn't appropriate. “We wouldn’t collaborate
or coordinate” with the NLRB “on a partnership like this and we wouldn’t on enforcement
because our statutes have entirely separate, different criteria,” he said. “Our enforcement
authorities are entirely separate and independent.”

The WHD has a separate, but also broad, interpretation of joint employment liability,
which was articulated in an
administrator’s interpretation last January.

Subway declined to elaborate on whether it faces joint employment risk as a result
of the agreement.

“As a franchisor we want to do all that we can to build a socially responsible brand,”
Michele Dinello, Subway's director of corporate communications, said in an e-mail.
“We are excited about our continued collaboration with the Department of Labor and
are committed to making available a platform for the DOL to provide training and resources
to independent franchise owners to ensure they have the tools necessary to comply
with wage and hour laws.”

Subway Had History of Violations

The voluntary agreement expanded on a less-formal partnership that began in 2012,
when the agency noticed repeated FLSA violations at Subway franchisees.

To build on occasional WHD training at Subway conferences, the division saw a chance
to provide deeper compliance outreach at the nation's largest franchiser by number
of stores.

The resulting agreement was signed July 26 and formally announced Aug. 1 in a WHD
blog. “It is an example of saying how do we have the biggest impact on compliance given
our limited resources,” Weil said in an interview.

“The opportunity for this kind of voluntary agreement really is an important way to
get scale on really building greater compliance in an industry like fast food, which
remains a very problematic industry in terms of the prevalence of wage-and-hour violations,”
he said.

But it wasn't just the number of Subway stores that compelled the WHD to negotiate
the deal. The 2012 training partnership didn't stop the division's investigators from
uncovering new violations, the agency said.

Between Oct. 1, 2012, and Sept. 30, 2015, the WHD concluded more than 800 compliance
actions at Subway franchisees, finding more than $2 million in back wages for more
than 6,000 workers, according to DOL figures.

“We wanted to go further with the relationship and have greater impact on compliance
than we were seeing,” Weil said.

The pact now calls for the WHD to create “easy-to-use compliance assistance materials
for the franchise restaurant industry,” developed with Subway input. The parties will
also meet every three months to discuss concluded investigations and regulatory updates.

Will More Franchisers Follow Suit?

Whether more companies join Subway in reaching compliance agreements for franchisees
remains to be seen.

Executives at the national food retail franchiser that declined to agree to the DOL's
terms did tell Bloomberg BNA that they remain open to further discussions.

One management-side wage-and-hour attorney said he expects his larger hotel and quick-service
food franchiser clients to be amenable to starting negotiations with the WHD.

Sure, there's risk, but the potential benefits of such an arrangement might make it
worth it, Bartlett said.

By coming to terms, “it becomes less likely that the Wage and Hour Division is going
to aggressively pursue a business. More likely than starting an investigation, they
would pick up the phone and call the point of contact at the business, and that’s
a great thing,” Bartlett said.

“In a straight FLSA case, I would envision if there were private litigation, I would
be talking about the wonderful things that we did in partnership with the Wage and
Hour Division to ensure we were in compliance with the laws, and that would help us
to avoid that third year of exposure under the FLSA and potentially liquidated damages,”
he said.

To contact the reporter on this story: Ben Penn in Washington at
bpenn@bna.com

To contact the editor responsible for this story: Susan J. McGolrick at
smcgolrick@bna.com

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